Why Maxing-Out Credit Cards Is A Terrible Idea
As your credit score improves and your salary increases, credit card companies may reach out and extend your credit limit – and sometimes they even offer high available limits to those who couldn’t possibly afford them. However, you shouldn’t allow yourself to be tempted by ever increasing credit card limits. Remember, that money isn’t yours and you eventually have to pay it back.
To avoid filling your plastic with credit card debt, consider these six reasons maxing-out your credit card is a terrible idea:
- Your credit score can potentially go from good to poor. Credit utilization, or the ratio of your credit card balances to the credit limits, makes up about 30 percent of your credit score. The general rule of thumb is to keep your balances below 30 percent of the credit maximum, though the lower the better.
- Lenders are less likely to loan you money. Mortgage and auto lenders will review your credit score and all the individual factors that determine your score to assess the likelihood you will pay your loans on time if at all. Think of your credit score as an indicator of your financial responsibility. If you have maxed out credit cards on your report, lenders may view you as a risk and deny your application.
- You risk overage charges and interest rate hikes. Most people swipe their cards without realizing how small purchases here and there can quickly add up and before they realize it, they’ve burned through their balance. Even if you’re hovering right below your credit limit, interest charges can push you over the edge. As a result, credit card companies can charge you overage fees or implement a penalty rate, which is usually the highest interest rate your creditors can charge.
- The monthly minimum payment increases. Credit card companies generally calculate your minimum monthly payments as a percentage of your balance plus interest. The amount you owe can range anywhere from about two to five percent. As your balance rises, your budget will become more strained until you find it becomes impossible to make your scheduled payments. Even if you are able to pay the minimum amount due, getting rid of your balance could take years as interest charges accumulate.
- Your credit card becomes a burden rather than a benefit. Used wisely, credit cards can actually provide some advantages, including building credit history, offering fraud protection, and the ability to cover the immediate expense of an emergency. However, if you’re balance-to-limit ratio is too high and hurting your score or if you no longer have access to funds when you need them, your credit card is no longer useful, becoming a money drain instead.
- Creditors can sue you if you do not pay them back. If you aren’t paying your credit card balances, creditors have the right to file a lawsuit against you and potentially garnish your wages. If the courts rule in their favor, they could seize a significant portion of your weekly earnings.
If these warnings may have come too late, New Era Debt Solutions may be able to offer you a way out. New Era is a debt settlement company that helps people dramatically reduce their debt obligation to secure their financial independence. Since 1999, we have settled over $200 million in debt for our clients.
To see if debt settlement is right for you, contact us or fill out the form on this page for your free debt analysis.